Asset Management Letter Archive

It feels like the market is following the old aphorism “Generals are always fighting the last war”. What we mean by that is the market seems to be reacting to an earnings dip as if we are slipping straight into 2008 again. They say “to forecast is folly”, but we do not believe a recession is imminent. Don’t take our word for it, though. Instead, consider the December jobs report of 312,000 jobs created or the auto sales increase to their highest rate since November 2017. Further, take the Federal Reserve’s report on the correlation of recessions and unemployment rate released December 19th, 2018 and the subsequent conclusion that we are 2 to 3 years away from a recession.

Of course, given Paul Samuelson’s quote many years ago that the stock market has predicted nine of the last five recessions, we felt it imperative that we speak with several of our flexible mandate managers at length in December and January, to make sure we weren’t missing anything. Making a long story short, the flexible mandate managers worry about the same things we (and you) do. However, where the rubber meets the road is in what actions they are taking. To that end, many of our managers have been putting money to work over the past six months. One in particular, FPA Crescent, who owned barely any financials in 2007/08 has built a significant position in financials over the past three years and has been adding more recently. When pressed, they indicated they felt there was potential for double digit earnings streams no matter the interest rate atmosphere. These types of decisive moves are the actions that matter most to us. Pontificating on debt levels, trade wars, profit margin levels, government shutdowns and interest rates to name a few is fun cocktail party talk, but where a manager is putting “dry powder” to work carries more weight for us. Keep in mind that an important distinction is many of our managers have significant cash they can put to work because they have previously worried about the macro concerns that have suddenly become important again, triggering opportunities to put their cash to work.

Naturally, moving to a more aggressive position into the teeth of a correction means the performance of our funds has not been as good as we would have liked. It reminds us of 1999 when value managers were trailing momentum/tech stocks and then from 2000 to 2003 they outperformed significantly, as people realized the fundamental value of a cheap company versus an overvalued growth story. Similarly, you can find solid companies that have fallen as much as 40% in 2018 now trading at valuations not seen since 2008 while sporting far better balance sheets. Does that mean momentum will start trailing value stocks? No one knows for certain, but when 93% of asset classes are down in one year (the highest reading since 1900), it feels as if the chips may be stacked to one side and ready to shift to the other, i.e., fundamentals. Couple this with the Wall Street Journal mentioning recently that 85% of trading is controlled by machines, models and passive investing and we feel more confident with active managers on a go-forward basis. On a trailing basis, however, we are frustrated as many of our managers have not protected as much as we would have liked in 2018, but neither has the Morningstar Moderate Targeti model (a diversified 60% equity portfolio) which was down 4.76%. The untold story behind similar returns in growth/value stocks in 2018 is the wild dispersion from the first to the second half of the year in growth stocks. Thus, some might argue the passive growth strategy is still winning the performance battle but we would argue that it is “fighting the last war”.

Conversely, if one didn’t believe the battle had changed, then it would make sense to stick to the same old strategy. One would consequently want to add to the areas that were most beaten up over the past thirteen weeks. Index funds in small cap value, energy, financials, semiconductors, and international would make the most sense if there were no significant fears of market downturn from this point. Keep in mind, however, that the proclaimed Father of Indexing, Jack Bogle, came out in December and said it’s time to “play it safe” because “trees don’t grow to the sky”. An interesting statement from a “buy and hold” index proponent. The follow-up comment he made was that investors should be thinking of how much risk they have rather than making a binary decision to be either in or out of the market. We couldn’t agree any more. However, how does one take action using Bogle’s strategy? Guess what? You are already in this type of strategy via our mix of flexible mandate managers and low cost index funds.

Finally, if you feel your risk tolerance has changed dramatically or the battle lines we have drawn disagree with your strategy, please call us with questions. We are foot soldiers on your side, so we will listen attentively to your instructions and continue to help build a battle plan to meet your needs.

General Compliance Disclosures

Statements made via this letter are the opinions of Creative Financial Group (“CFG”) and its advisors, and are not to be construed as guarantees, warranties or predictions of future events, portfolio allocations, portfolio results, investment returns, or other outcomes. None of the information contained is intended as a solicitation or offer to purchase or sell a specific security, mutual fund, bond, or any other investment. Readers should not assume that the considerations, suggestions, or recommendations will be profitable, suitable to their circumstances or that future investment and/or portfolio performance will be profitable or favorable. Past performance of indices, mutual funds, or actual portfolios does not guarantee future results. Future results may differ significantly from the past due to materially different economic and market conditions; investments in securities or other financial products involve risk and the possibility of loss, including a permanent loss of principal. Investments are not FDIC insured and have no bank guarantee.

Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank.

Investment products and services provided by Synovus are offered through Synovus Securities, Inc. (“SSI”), Synovus Trust Company, N.A. (“STC”), GLOBALT, a separately identifiable division of STC and Creative Financial Group, a division of SSI. Trust services for Synovus are provided by Synovus Trust Company, N.A. The registered broker-dealer offering brokerage products for Synovus is Synovus Securities, Inc., member FINRA/SIPC. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested.

Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank and Synovus Trust. Synovus Trust Company, N.A. is a subsidiary of Synovus Bank.

Pursuant to rules adopted by the U.S. Securities and Exchange Commission governing federally registered investment advisors, we request that you take time to compare your account balances and statements issued by National Financial Services, who acts as the custodian for your account(s). We request you contact us immediately if you do not receive these statements or if the values reflected are materially different.

Cost basis reporting

If you buy and sell a security in a taxable account on or after the effective date, NFS will report cost basis for the sold security to you and the IRS on Form 1099-B. If you have a mix of covered and uncovered positions in the same security, NFS will report cost basis to you and the IRS for any covered position that is sold. NFS will apply the FIFO (First In, First Out) default method unless you inform us of a different method. Your cost basis method for all transactions must be final by settlement date. If you choose to change the default method, you can do so by notifying your Financial Consultant.

Use of Indexes

iThe investment return and style information and comparisons employ a variety of popular indices, and the index contents and strategies are the property of their respective companies (e.g., Dow Jones, Standard & Poor’s, Morningstar, Barclay Capital, Russell). Although the data is believed to be reliable, CFG makes no warranty with respect to the contents, accuracy, completeness, timeliness, suitability, or reliability of the information, which is represented here for informational use only and should not be considered investment advice or recommendation. None of the indices can be invested directly, and the return figures for these various securities indices are reported without management fees, trading costs, or other expenses subtracted from the returns, and are shown on a total return basis that assumes reinvestment of applicable capital gains and dividends. Components of indices may change over time. Small capitalization stocks are represented by the Russell 2000 Index. Mid Capitalization stocks are represented by the S&P Mid Cap 400 Index. Foreign stocks are represented by the MSCI EAFE Index and emerging markets are represented by the MSCI Emerging Markets Index.

Despite heightened volatility, the S&P 500 index ended the year where it started, with its 2% return coming from dividends. Smaller and mid-cap stocks closed the year down 4.2% and 1.7%, respectively, despite also posting double-digit fourth-quarter gains. Fear over Europe and slowing growth in China dragged foreign stocks down 11.8%, with China concerns and a flight from risk hitting emerging-markets stocks even harder; they fell 18.8%.

High-quality bonds were on the other side of the volatility, with sharp flight-to-safety rallies that helped net the Barclays Aggregate Bond Index a 7.4% full-year gain. Our allocations to flexible bond and absolute-return-oriented fixed income funds hurt performance in our portfolios because they provided less of the short-term protection of high-quality long term bonds, but we remain confident in our belief that our bond allocations will provide better longer-term returns than the pure high-grade benchmark at still-acceptable risk levels. In addition, with the consensus forecasts among the 74 economists polled by Bloomberg at the beginning 2011 for the year-end closing yields of the 2-, 10-, and 30-year Treasuries of 1.10%, 3.75%, and 4.75%, respectively, we did not see a reason to extend duration and purchase long term Treasury bonds. The fact that the actual levels were 0.26%, 1.88%, and 2.90%, respectively, highlighted the under performance of some our active managers. In our opinion this shows the folly of short term forecasts, not a breakdown in logic. Over shorter periods in which investors’ decisions about getting in and out of stocks are driven by macro headlines (often referred to as “risk-on, risk-off”) there is less consideration for fundamentals of individual stocks and bonds. Our experience suggests this creates long-term opportunities, but this can be frustrating over shorter periods.

The roller coaster ride of the market against the backdrop of harsh global news coverage makes us happy to say “goodbye” to the third quarter of this year, which posted the worst third quarter S&P 500 loss since 2002. The S&P 500 was down 14.33% for the quarter and is down 8.68% for the year. Foreign stocks fared worse than the S&P 500 as the MSCI EAFE Index was down 14.98% for the quarter and 19.01% for the year. Even worse than the S&P 500 and the foreign market, the Russell 2000 Small Cap Index was down 21.9% and is down 17% for the year. Fixed income was the saving grace as the Barclays Aggregate Bond Index was up 3.82% for the quarter and is up 6.65% for the year. That being said, it is hard to get excited about the long term prospects of a ten year Treasury yielding less than 2%. From a safety and total return standpoint the Treasury trade has worked out over the short term but we are frankly confused by the attraction of an investment that ties up capital at 2% for the next ten years and this is part of the reason we continue to drift towards equities (many with debt levels at 20 year lows and substantial cash flow to boot).

The risk we alluded to in previous letters hit a tipping point in the second quarter as volatility returned to the market. The headlines were dominated by the fear of a Greek default on their outstanding debt, wildly fluctuating oil prices, death of Osama bin Laden, and the on-going political battle over the US debt ceiling. Of course, a late month rebound helped boost the market as it became increasing likely that the EU and IMF would manage to kick Greece’s debt “can” down the road at least one more time. When the dust settled, stocks wound up roughly flat for the quarter. The large cap S&P 500 Index was up 6% for the year. The small-cap Russell 2000 was down 1.6% for the quarter but still up 6.2% for the year. The MSCI World ex-USA was up 1.1% for the quarter and rests at positive 5.1% for the year, in spite of the European contagion fears. Fixed income provided a calmer ride as the Barclays Aggregate Bond Index was up 2.37% for the quarter leaving it with a year-to-date gain of 2.36%.

Creative Financial Group (“CFG”) is a division of Synovus Securities, Inc (“SSI”), member FINRA/SIPC. Prior to January 1, 2011, CFG was a separate registered investment adviser affiliate of SSI. Investment products and services are not FDIC insured, are not deposits of or other obligations of Synovus Bank, are not guaranteed by Synovus Bank and involve investment risk, including possible loss of principal amount invested. Synovus Securities, Inc. is a subsidiary of Synovus Financial Corp and an affiliate of Synovus Bank. You can obtain more information about Synovus Securities, Inc. and its Registered Representatives by accessing BrokerCheck